Are energy markets coming back to haunt equities?

One thing is short-term oil production cuts (positive for the oil price) and electric vehicles adoption (negative for the oil price), but long-term supply will be challenged as global oil and gas majors have still not lifted real capital expenditures back to levels from before the pandemic. This will constrain long-term production and underpin prices. What is the crude oil price that will balance the market? Our Head of Commodity Strategy, Ole S. Hansen, has the view that $100/brl is the upper limit for now giving the current price of refined oil products and the slowing economy. This concern is also reflected among speculative participants such as hedge funds which not significantly moved into long positions in crude oil as the risks to the economy, and ultimately oil, remains elevated.

Energy markets are many things. Crude oil is key for transportation (more than 50% of demand), but energy markets are also about heating (here natural gas prices are key determinant of the price consumers are paying), and manufacturing and households using electricity for production and living. Here the 1-year forward price on baseload electricity in Germany is still sitting 250% above levels observed in 2013. The war in Ukraine has made energy markets more sensitive to adverse developments and the weather this winter will play a crucial role for Europe.

With energy coming back into focus it worth reflecting on the expected returns in the global energy sector. The MSCI World Energy Sector Index has a dividend yield of 4.1% and a buyback yield of around 1%. Even assuming no real earnings growth over the next decade leads to quite interesting real expected rate of return of more than 5%.

Nuclear vs offshore wind